MINING FINANCE / INVESTMENT

Where is the value? Gold seems to be the answer.

With the financial markets responding well to the actions of the major central banks and looking for a thaw in the recent freeze, how have the metals behaved in a wider context, and what is the outlook now? Gold seems to be the answer whichever way we look.

LONDON - 

With all the mayhem and volatility of recent weeks it is worth standing back a little and gaining a sense of perspective.  This will, piece therefore be redolent with numbers in a brief examination relative performances in order to see what can be gleaned in terms of the prospects as, the markets possibly return to something approximating to normality - although this of course, may yet take some time.

First - the history.

Different markets turned at different points so perhaps one logical starting point for these purposes is the close of business on Friday 11^th July, which approximates to the peak for the majority of the asset classes here.  Obviously there are "lies, damned lies and statistics" so the changes over a twelve-month period are also taken into account. Over these periods, the changes among some of the major assets and ratios are as follows:

Outright changes (ranked by the change from 11^th July to 10^th October)

Followers of the precious metals markets will not be remotely surprised to see platinum and palladium topping this list, and the sharp declines on the energy markets are also clear to see.  Gold is the best performing metal, while the internationally-weighted dollar is surpassed only by the dollar:euro rate, as the markets have demonstrated their clear aversion to risk. 

The strength in the dollar has stemmed in some part from the purchase of Treasuries, both on the part of institutional investors moving away from higher-risk instruments including commercial paper, and also by central banks. Gold has also continued to attract risk-averse investors, as illustrated by the increase of more than 155 tonnes in ETFs since mid-July (and especially since mid-September), regardless of the strength in the dollar as investors have sought a diversified set of safe havens.

The important ratios make interesting reading in this respect: -

Gold has outperformed the S+P by 30% since the commodities peak, and its relative performance with respect to both oil and silver is also telling. In the case of silver, this is partly because silver is naturally more volatile than gold and we are considering a bear phase, so silver should have been the under-performer.  Equally, though, silver is essentially an industrial metal and it has been suffering from concerns about the economic outlook and the gold:silver ratio has been as wide as 80 in mid-October, the highest since June 2003.  Fundamentals suggest that this could yet widen further.

The gold:oil ratio stood at 11.6 at the end of last week, the highest since January 2007, and with the markets remaining concerned about the economic outlook this ratio, too,  should continue to rise.

In the medium term, and as outlined in a piece posted on this site last week, the dollar may weaken if the markets come to expect the printing of massive amounts of the currency in order to help fund liquidity and any such expectation is likely also to be supportive for the gold price.  Equally, if the markets remain uncertain of the likely course of events over the net few weeks, then Treasuries should remain a safe haven and gold will also be in demand.

In other works, either scenario should continue to favour gold.